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China as a lynch pin? « Previous | |Next »
September 1, 2011

In this article in Mute it is stated that China has changed from a failed attempt at autarkic state capitalism into the second largest economy in the world and the largest industrial producer. In 1990 it produced 3 percent of the world's industrial output, 20 years later 19.8 percent, overtaking the US who has held that position for 110 years.

This was made possible through the ruthless exploitation of a large cheap labor force; the massive exploitation of natural resources and its consequent degradation of the environment; and a growth model that depends on expanding exports to the markets of core capitalist countries.The article says:

China's dramatic expansion has benefited the advanced capitals in several ways: its cheap products were the main reason why inflation remained low, the combination of its low wages and modern technology brought huge profits to Western and Japanese investors, and the realistic threat to move production to China helped to curb wages in the advanced countries.

On the expansion of the world market, its impact has also been crucial: less by the opening of its domestic market (which is certainly large and growing, but limited by the extreme poverty of the majority of its population) than by its indirect and paradoxical effect on the market of its customers. Because its expansion was driven by external trade, and because the state kept the lid on Chinese wages and thus on the consumption of the working class, since their low level is its main competitive weapon, each year China obtained a growing trade surplus.
As in other state capitalist countries before it (especially Japan), whose industrial development depended on the US market, China used these profits to accumulate a hoard consisting of dollars, public debt and US securities.

The question becomes: can a half Communist and half capitalist China continue to be the driver of the global economy when the US and Europe are in recession?

There are limits to its growth. China's beneficial effect was primarily based on its abundant supply of dirt cheap labour power, well disciplined with the help of Confucius and Stalin. It's weakening because the development of China is changing its society to an industrial and this is pushing the value of labour power higher. Wages are rising. The response is a producer at the cutting edge by using its financial reserves to buy the best technology in all sectors including renewable energy.

U.S. and European economies struggle with stagnation and face potentially increasing crises in the future as the economic contraction continues. In the Financial Times Martin Wolf says:

The depth of the contraction and the weakness of the recovery are both result and cause of the ongoing economic fragility. They are a result, because excessive private sector debt interacts with weak asset prices, particularly of housing, to depress demand. They are a cause, because the weaker is the expected growth in demand, the smaller is the desire of companies to invest and the more subdued is the impulse to lend.

He adds that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the eurozone is stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes, a panic and back to bad fundamentals are large, with further economic contraction ahead.

China will continue to grow, but less than before because China can no longer rely on exports to lead its economic expansion given the ongoing contraction in the the US and Europe. Consequently, China needs to rebalance toward a domestic consumption-led economy. Its core social problem is how will it employ all the migrants and other refugees from rural poverty, but also the millions of graduates for whom there is no more place in the economy.

| Posted by Gary Sauer-Thompson at 2:31 PM | | Comments (3)
Comments

Comments

the message from the economists is: 'keep the faith. keep shopping.'

I don't want to buy any more branded crap. I don't need it. Gerry Harvey can go to hell.

A few random observations, and then a comment:

First, I’m not so sure China ever adopted a strictly autarkic trade policy.

Second, the rapid growth of Chinese trade after the mid-1970s has a lot to do with the removal of the US embargo which lasted from 1949 to the aftermath of Nixon’s visit. The US refused to trade with those nasty Commies for nearly thirty years.

Third, the Chinese Govt. controls the volume and value of foreign trade and investment, partly through regulation, partly through control of the exchange rate. This is very unpopular among free-trade ideologues, even though most of the rest of the world did the same thing for years. The US’ massive industrial system grew up behind tariff barriers which arose after their Civil War and didn’t begin to come down until the 1960s – in respect of a number of products and commodities, barriers are still in place there. Free-traders like to persuade people that China is somehow cheating. There is a pretty strong flavour of this attitude in the quoted article, in references to the Chinese “hoard” of foreign currency credits (hoarding is bad, don’t you know) and in reference to China’s need to “rebalance” towards domestic consumption (being out of balance is bad, too, as though an economy somehow resembles a bicycle).

That the world economy is currently in difficulties has not so much to do with China, but a lot to do with an artificial and avoidable collapse of the financial system, starting in the US. Blaming China makes a lot of people feel good, but fundamentally isn’t the point.